By Rob Kozlowski
Source: Pensions & Investments

U.S. corporate pension plans continue to lower their pension contributions as a strong market and accelerated pension contributions in the past have kept funding levels healthy despite the effects of the COVID-19 pandemic.

U.S. corporations plan to contribute a total of slightly less than $15 billion to their global pension plans in 2021, according to Pensions & Investments’ analysis of S&P 500 companies that announced contributions of at least $100 million.

The total is significantly lower than in past years, thanks to strong investment returns that have improved funding ratios significantly as well as accelerated discretionary contributions made since 2017 that have fulfilled minimum required contributions for multiple years.

The data reflect S&P 500 companies’ expected contributions disclosed in their 10-K filings with the Securities and Exchange Commission between Jan. 28 and March 4, before single-employer pension funding relief was adopted in the American Rescue Plan Act of 2021 that may lower minimum required contributions.

The 42 companies tracked said they planned to make a total of $14.9 billion in contributions to their global pension plans in 2021, according to their 10-K filings. Those same companies said they contributed a total of $14 billion to the plans in 2020. The 52 companies P&I tracked one year ago said they expected to contribute a total of $21 billion to their plans in 2020.

Five companies that expect to make no or little contributions this year made contributions totaling $8.7 billion last year, reported in 2021, well above the combined $1.63 billion those companies had said they planned to contribute for the year.

Only three companies announced plans to contribute at least $1 billion to their plans in 2021.

Chevron Corp., San Ramon, Calif., plans to contribute $1.1 billion to its U.S. plans and $200 million to its non-U.S. plans in 2021; Lockheed Martin Corp., Bethesda, Md., plans to contribute $1 billion to its global plans; and Dow Inc., Midland, Mich., also plans to contribute at least $1 billion, specifically to its U.S. plans. In the latter case, Dow announced all these contributions are going to the chemical company’s U.S. plans in an 8-K filing on March 4 that also said it will freeze the benefit accruals of those plans at the end of 2023 and increase the matching contributions in its 401(k) plan.

Dow originally announced it planned to contribute the minimum required $300 million to its global pension plans during the year in its 10-K filing with the SEC on Feb. 5.

Growing dispersion

Royce Kosoff, Philadelphia-based managing director, retirement, for Willis Towers Watson PLC, said in a telephone interview there is a growing dispersion between corporate pension plan contribution scenarios.

“The ‘typical’ plan sponsor,” Mr. Kosoff said. “That notion doesn’t really exist. (There is everything) from fully funded plans with no real need for funding and contributions, down to plans that have to make significant contributions even with the current relief.”

Scott Jarboe, a Washington-based partner in Mercer’s U.S. wealth business, said in an interview that “the dispersion of results during 2020 was astounding.”

Mercer tracks the funding ratios of S&P 1500 companies with defined benefit plans.

“The average plan went from 87% funding at the end of 2019 to about 84% at the end of 2020, and somewhere in the middle around there, in March (2020) it fell to 74%,” he said.

However, he said in 2020, “on average, the top decile of those plans improved funded status by 13 (percentage points), whereas the bottom decile declined by 21 (percentage points).”

On the one hand, there are companies that are in solid funding shape thanks in part to actions taken in 2017 and 2018.

U.S. corporations made large contributions in those two years for the most part to take advantage of tax breaks that were set to expire due to the passage of the Tax Cuts and Jobs Act, signed into law by then-President Donald Trump in December 2017. The law reduced the corporate tax rate to 21% from 35%.

Because tax law allows plan sponsors to deduct a portion of their pension contributions based on its tax rate, corporations poured billions into their pension plans to meet the Sept. 15, 2018, tax deadline to deduct contributions at the higher 2017 rate.

These actions fulfilled the minimum required contribution requirements for multiple years for many companies. The number of S&P 500 companies planning to contribute $100 million or more to their plans has been falling for several years from a peak of 66 companies in 2018.

According to Mr. Jarboe, S&P 1500 companies contributed a total of $75 billion to their DB plans in fiscal year 2018. That number had dropped to $45 billion each in fiscal years 2019 and 2020, he said.

On the other hand, there are companies in industries who have been hard hit by the COVID-19 pandemic. The Coronavirus Aid, Relief and Economic Security Act, signed by Mr. Trump in March 2020, provided companies the option of a one-year holiday from making 2020 pension contributions, with interest accrued, until Jan. 1, 2021.

While not a large number of companies took advantage of the deferral, those who did so were generally in pandemic-devastated industries.

One was American Airlines Inc., Fort Worth, Texas. The airline plans to contribute a total of about $827 million to its defined benefit plans in 2021. Of that total, $130 million consists of minimum contributions for 2020 that were deferred under the provisions of the CARES Act.

More funding relief

Further funding relief, primarily targeted for companies in pandemic-afflicted industries but long desired by most in the industry, was included with the new American Rescue Plan Act of 2021, signed into law by President Joe Biden on March 11.

The act provides interest-rate stabilization and longer amortization periods for plans.

Interest-rate-stabilization measures enacted by the Moving Ahead for Progress in the 21st Century Act, or MAP-21, signed into law by then-President Barack Obama in July 2012, allowed corporate plan sponsors to take a 25-year historic average of corporate bond rates to determine a rate within a 10% range, or corridor, of the two-year average of corporate bond index rates to calculate their pension liabilities.

The beginning of the phaseout of those provisions was originally set for 2021. The American Rescue Plan now narrows that range of the two-year average to 5% from 10% through 2025, at which point the corridor begins to gradually widen until it hits 30% in 2030.

The act also provides for 15-year amortization of funding shortfalls, up from seven years, for plan years beginning after Dec. 31, 2021. Corporate plan sponsors can use that amortization for plan years beginning in 2019, 2020 or 2021.

Now, the question is whether to take advantage of the new relief and face lower funding ratios and higher PBGC variable premiums in the short term.

Michael Moran, senior pension strategist at Goldman Sachs Asset Management in New York, said in an interview that the contribution strategy of companies will likely not shift too much following the passage of the funding relief.

“I think some companies saw when the Senate turned at the beginning of January, I would say the outlook for extending funding relief became brighter,” Mr. Moran said. He added it was likely that the expected contributions that companies announced in 10-K filings had already taken an extension of funding relief into account.

However, he said, “even in an environment where contribution requirements may be low because of funding relief, or because of previous voluntary contributions — whether tax-driven or not — they’re still paying PBGC premiums on those deficits.”

Mr. Moran said increasingly over the past couple of years, many of his clients are linking a large part of their contribution strategies to lowering those PBGC premiums.

The PBGC’s variable rates for single-employer plans are determined by the funded status of those plans.

Silver lining

Oleg Gershkovich, New York-based LDI solutions strategist and senior actuary with Voya Investment Management, noted in an interview there was one positive regarding those PBGC rates: This was the first funding relief passed in the post-Pension Protection Act of 2006 era that is not being supplemented with a rise in PBGC rates.

The MAP-21 provisions, for example, included rate hikes. Before MAP-21 was enacted, the variable rate for single-employer plans was just $9 per $1,000 of underfunding in 2013. This year, the rate is $46 per $1,000 of underfunding.

Mr. Jarboe said that a Mercer survey last year shows that 72% of corporate plan sponsors want to contribute more than the minimum required amounts, but in an informal survey during a recent roundtable, about 50% of surveyed sponsors said they planned to take advantage of funding relief.

Despite the opportunity of that relief, he said, the underlying economics of individual corporate plans haven’t changed. The variable rates haven’t changed and profit and loss measures haven’t changed.

“Is that business case stronger (for smaller contributions) than the flip side impact of higher PBGC premiums for longer?” Mr. Jarboe asked.

It would also mean maintaining the plan for longer “because a lot of the (existing) funding strategies are in place for some sort of derisking or pension risk transfer or termination altogether,” he said.

Largest contributors

Two of the largest expected contributions for 2021 come from major U.S. automakers that plan to make large injections to their non-U.S. plans. Ford Motor Co., Dearborn, Mich., plans to contribute between $600 million and $800 million to its non-U.S. plans in 2021, and General Motors Co., Detroit plans to contribute about $500 million to its non-U.S. plans during the year. According to their 10-K filings, neither company plans to make contributions to their U.S. qualified pension plans.

Some companies also expect to make some significant discretionary contributions.

Purchase, N.Y.-based PepsiCo Inc.’s board of directors in November approved a total of $500 million in discretionary contributions to its U.S. pension plans in 2021, $300 million of which was contributed in January. The food and beverage maker plans to contribute the remaining $200 million in the third quarter. The total minimum required contributions for the U.S. and non-U.S. plans combined is $160 million.

Regardless of the condition of the individual company, U.S. corporations have to contend with the fallout of the Great Recession 13 years ago that has kept interest rates at record lows, which make pension liabilities higher.

A paper by Voya’s Mr. Gershkovich and Atlanta-based senior vice president and fixed-income client portfolio manager Brett Cornwell features an analysis of S&P 500 companies with DB plans, which between the 2008 recession and the end of 2019 contributed a total of $498 billion to those plans but only recovered one-third of the original 28-percentage-point drop in funded status to 78% at the end of 2008 from 106% at the end of 2007.

Mr. Cornwell said in an interview that many of his corporate clients may have finally stopped waiting for interest rates to rise.

“Every time they think rates can’t go lower, they keep being wrong about that,” Mr. Cornwell said. The U.S. discount rates for the companies P&I tracked ranged from 1.7% to 3.45%, down from 2.9% to 4.36% last year.

Rather than wait for interest rates to rise and liabilities to drop, they’re embracing strategies to hedge interest-rate risk to avoid having to make greater contributions.

“It’s more responsible behavior in terms of hedging interest-rate risk even without the additional contributions,” he said. “They seem to be much more rate agnostic, looking to hedge the volatility of rates rather than looking at a specific level.”